Sigma Pharmaceuticals has defended the timing of its release of its 2009-10 financial report and its $389 million of losses which triggered a 48% slide in the share price on March 31.
The release of the report had been delayed a week by the company as it completed impairment tests on its assets (mostly goodwill) and discussed their implication with lenders, the company said in a reply to an ASX query yesterday.
Sigma has been asked by the ASX last Thursday to explain when it first became aware that it was likely there would be a material reduction in the carrying amount of goodwill on the company’s balance sheet.
Included in that report was $420 million in asset write-downs (described as non-cash, but certainly having a financial impact on shareholders) on the goodwill of its generic drugs business.
The goodwill impairment comprised $375.1 million on the Arrow generics business, and $49.1 million on Sigma’s Herron brand due to a weaker performance of the brand in grocery stores.
Sigma said in its reply to the ASX that it had undertaken specific impairment testing in conjunction with the preparation of its financial statements for the year ended January 31, 2010.
"An extensive review was undertaken throughout March 2010 to determine the need for and extent of impairment required," Sigma said.
"As a result of the testing and review that was undertaken, which was continuing, the company believes it became aware that it was likely that there would be a material reduction in the carrying amount of goodwill on the company’s balance sheet around the middle of March 2010, leading to the first market update."
Sigma had asked for its shares to be suspended on February 25 before trading started. The shares had closed the previous day at 90c.
Sigma had explained there would be delays in the release of the accounts in relation to revised earnings guidance arising from year-end adjustments.
Sigma had issued another market update on March 18 in which it said it may not pay a dividend in the second half of its fiscal year and was renegotiating the terms of its banking covenants.
That was the first the market heard that its bankers might be concerned about the result.
Sigma had said that increased recent market pressures, especially in its generic drugs business, had led to a fall in cash flow forecast.
The reduction in expected cash flows and changes in Sigma’s estimated cost of capital were likely to result in a "material" reduction in the carrying amount of goodwill on the company’s balance sheet.
The ASX also asked Sigma when it first became aware that it was likely to be in breach of certain borrowing covenants.
Sigma said in its reply that it had held talks with its lenders in March 2010 to resolve the implications of the potential adjustments for its financial covenants.
"Those discussions with the lenders were at all times positive and constructive, the lenders remained supportive, and discussions were concluded shortly prior to the release of the preliminary final report (on March 31)," Sigma said.
"The company believes that it became aware that it would be likely to be in breach of such covenants (as foreshadowed in the first market update and subsequently in the preliminary final report) around mid-March 2010."
Sigma shares rose 45c to 46c.
The loss from the 90 cent value before February 25 is a touch under 50%.
